The expected revenue fall of major drug companies as they face patent expiration of key drugs, the decline in new product introductions, ongoing cost-containment efforts in healthcare expenditures in established markets in the United States and Western Europe, and pharmaceutical industry growth in emerging markets, have laid the foundation for innovator-drug and generic-drug companies to develop strategies to respond to these changing industry fundamentals. The net result is a blurring of the traditional strategic boundaries between innovator-drug and generic-drug companies. Innovator-drug companies are seeking to diversify and build their positions in generics, which includes product positions in emerging markets. In turn, the major generic-drug companies have to decide how to best avail themselves of the large opportunity resulting from the wave of patent expiries as well as their own diversification into new drug development.

Blockbuster patent expirations, pressure to control healthcare spending, a decline in productivity in research and development (R&D), and the rise of emerging markets are four major trends affecting the direction of the global pharmaceutical market, pointed out Kimberly Wagner, senior partner and managing director at The Boston Consulting Group. Wagner spoke at the Drug, Chemical and Associated Technologies Association’s (DCAT) Business Development Forum held during DCAT Week in mid-March. 

The decline in R&D productivity is evident by the decline in the number of approvals for new molecular entities (NMEs) during the past two decades. Wagner pointed out that between 1990–1999, an average of 45.1 NMEs were approved annually. This figure declined to an average of 32.4 NMEs approved annually between 2000 and 2004, and further declined to 22.4 NME approvals between 2005–2009.

 The rise of emerging markets is another important trend as shown by shifting population trends. Although the US and Europe currently represent the largest areas for healthcare spending, population patterns favor emerging markets, particularly Asia. Wagner pointed out that Asia accounts for 56% of the world’s population, Africa 13%, Latin America 9%, and the Middle East 7%. In contrast, North America accounts for only 5% of the world’s population and Europe 10%. As economies, particularly in India and China, continue to grow, and the middle class in those economies expand, these markets will rise in importance for healthcare expenditures, including pharmaceutical expenditures. 

Wagner pointed out, however, that the criteria for success in established markets and emerging markets differ. “In established markets, product strategy evolves around new chemical entities, a long innovation cycle, building a strong patent position, and seeking registration or approval of pharmaceutical products in the US and European Union,” she said. “In contrast, the criteria for success in emerging markets evolve around line extensions and fixed combinations, a rapid innovation cycle, speed to market, brands, and local registration,” she said. With these requirements, the emphasis in emerging markets is on local manufacturing, low-cost sourcing and manufacturing, and product registration of multiple small products that can be differentiated at a local level, explained Wagner. For established markets, the product strategy is different, marked by an emphasis on achieving higher scale in manufacturing to meet larger volumes, the use of imports from high-cost countries such as the US or countries in Western Europe, and more reliance on the global blockbuster model. 

In addition to adapting a strategy to serve emerging markets, Wagner pointed out that the changing fundamentals are obliging innovator-drug companies to place a greater focus on life-cycle management in their product portfolios and to seek diversification in adjacent businesses as a means to develop additional revenue streams. This diversification can involve building a position in generics, over-the-counter drug products, diagnostics, nutritionals, medical devices, and medical technologies. 

Generic-drug companies also have to adapt their strategies to the underlying trends of blockbuster patent expirations, healthcare cost pressures, the decline in R&D productivity, and emerging markets, said Wagner. “For blockbuster patent expirations, the key is taking advantage of the anticipated industry blockbuster LOE [loss of exclusivity] and to take action to adapt to future substrate gaps,” she said. “Generic-drug companies will need to achieve deeper penetration in established markets and continue expansion in emerging markets,” she added. She anticipates continuing consolidation in the generic-drug sector  as a way for companies to gain scale and optimize their cost structures at both the manufacturing and commercial levels. Moreover, generic-drug companies will further have to adopt to demand for product innovation by developing value-added generics either through new combinations or formulations as well as by experimenting with risk-sharing and innovative partnership models in R&D not only for valued-added generic products but also for innovative products, she said. 

“What we see now is a trend toward diversification into adjacent spaces by innovator-drug companies and generic-drug companies,” said Wagner. Sectors that were once separated (i.e., bulk and fine chemicals, generics, branded and value-added generics, line extensions, and innovative drug development) that had clear delineation between innovator-drug  and generic-drug companies are now becoming blurred, she explained. Generic-drug companies are seeking to strengthen their positions in value-added generics and novel drugs. Innovator-drug companies are seeking a presence not only in innovative-drug products but also in generics through line extensions, branded and value-added generics, and generics overall as part of their greater attention to product life-cycle management. “The key question is what will happen when they meet in the market,” said Wagner.



Innovator-drug companies position in generics


Recent activity by several Big-Pharma companies reflect the increased interest in diversification strategies such as building a position in generics to strengthen their position in generics but also in emerging markets. For example, Novartis, through Sandoz, its generic-drug business, had 2009 sales of $7.5 billion in generic drugs and added to that position in 2009 by acquiring the generic oncology injectables business of EBEWE for EUR 925 million ($1.3 billion).

In March 2010, AstraZeneca (London) signed a license and supply agreement with the Indian drug company and manufacturer Torrent Pharmaceuticals, under which Torrent will supply to AstraZeneca a portfolio of generic medicines for emerging markets. In 2009, GlaxoSmithline (GSK, London) partnered with India’s Dr. Reddy Laboratories (Hyderabad, Andhra Pradesh, India) under which Dr. Reddy will manufacture and supply drugs to GSK, which will license and comarket the drugs in various countries in Africa, the Middle East, Asia-Pacific, and Latin America. In December 2009, GSK extended its strategic relationship and acquired a 19% stake in the South African pharmaceutical company Aspen PharmaCare to serve emerging markets.

Earlier this year, Pfizer formed a collaboration with India’s Strides Arcolab under which Pfizer will commercialize off-patent sterile injectable and oral products in the US. The finished dosage-form products will be licensed and supplied by Strides, Onco Laboratories, and Onco Therapies, two joint ventures between Strides and Aspen PharmaCare. And in 2009, Pfizer partnered with two Indian pharmaceutical manufacturers: Aurobindo Pharma and Claris Lifesciences. Under the deal with Aurobindo, Pfizer acquired the rights to 55 solid oral-dose products and five sterile injectables in 70 emerging markets and will commercialize those products. Pfizer also acquired the rights to 15 generic injectables from Claris Lifesciences.

Also, sanofi-aventis enhanced its generic-drug portfolio and position in emerging markets during the last two years with several acquisitions of generic-drug companies: Zentiva (Czech Republic), Kendrick (Mexico), and Medley (Brazil). And the Japanese pharmaceutical company Daiichi Sanyko (Tokyo) acquired a majority stake in the Indian pharmaceutical company Ranbaxy Laboratories (Gurgaon, Haryana, India)  in 2008. 



Generic-drug companies position in new drug development


In turn, several major generic-drug companies have had and continue to build their positions in innovator-drug development. Teva Pharmaceutical (Jerusalem), for example, the largest generic-drug manufacturer, has a proprietary R&D pipeline in three specialty areas: neurological disorders, autoimmune diseases, and oncology. The company has two marketed innovative products: the multiple sclerosis drug Copaxone (glatiramer acetate) and Azlitect (rasagiline), a drug to treat Parkinson’s disease, which respectively garnered sales of $2.8 billion and $243 million in 2009. Mylan (Pittsburgh) has branded pharmaceutical sales through its Dey specialty pharmaceutical business. Dey focuses on the development, manufacture, and marketing of innovative drugs in the respiratory and severe allergy markets. This business garnered sales of $455.7 million in 2009. Other examples of generic-drug companies with positions in innovative drugs include: Watson (Corona, CA), which has branded drugs focusing on urology and women’s health, and Par Pharmaceuticals (Woodcliff Lake), which has branded products through its Strativa Pharmaceuticals division. And Dr. Reddy’s Laboratories has a proprietary drug-discovery business through its subsidiary Aurigene and has branded sales and a pipeline of proprietary dermatological drugs  through its subsidiary Promius Pharma. 


Articles

Global Feature

The traditional lines of demarcation between innovator-drug and generic-drug companies are blurring as each sector responds to changing industry fundamentals.

The Changing Business Models for Innovator-Drug and Generic-Drug Companies


Although the wave of US patent expiries in the innovator-drug market potentially bodes well for the generic-drug market, competitive pressures are tempering the outlook. Already high penetration of generic drugs in many larger markets, including the United States, along with negative to flat growth in those markets, is increasing the likelihood of further consolidation overall and the need for generic-drug companies to develop strategies to take advantage of opportunities in smaller, but higher-growth markets in Latin America and the Asia-Pacific region. 




The global generics market is valued at $150 billion, which includes off-patent products, branded generics, and similars (i.e., such as in Latin America), according to Mike Chace-Ortiz, senior director of product strategy of the generics and active pharmaceutical ingredient intelligence unit at Thomson Reuters Healthcare and Science. Chace-Ortiz spoke at an educational program on the generic-drug industry, which was organized by the Drug, Chemical, and Associated Technologies Association (DCAT) during DCAT Week in mid-March. The United States and Canada are collectively the largest markets for generic drugs, accounting for $60 billion, followed by Western Europe at $29 billion. China and Latin America, each account for $14 billion, Eastern Europe, including Russia, represents $10 billion, Japan $3 billion, and the rest of the world $20 billion. 

Chace-Ortiz points out that many of the established markets for generic drugs are saturated and as a result, are experiencing slow growth. Seventy-five percent of global generic sales are found in 14 markets, all of which already have generic-drug market penetration in excess of 70% on a volume basis. For example, the US generic-drug market is valued at approximately $63 billion, and generic drugs represent approximately 71.5% of the US drug market on a volume basis. China’s generic-drug market is valued at $14.6 billion and has a 70% market penetration of generic drugs, and India’s generic-drug market is valued at $9.2 billion with a 99.8% penetration of generic drugs. As a result, “there is flat or negative growth in virtually all highly genericized markets,” said Chace-Ortiz. Markets with negative or flat growth include the US (–1.5%), Russia (–13.0%), Brazil (–4.9%), and India (0%). A few countries with highly genericized pharmaceutical markets still have positive growth in generic drugs, most notably, China with growth of 19.5%. But overall, growth is more favorable in “smaller, challenging countries,” where although the markets are smaller on a value basis, they offer higher growth rates because of lower generic-drug market penetration, said Chace-Ortiz.

Markets fitting that description include Canada (generic-drug sales of $4.6 billion, 51% market penetration of generic drugs, and 5.0% annual growth) and Japan (generic-drug sales of $3.1 billion, 17.2% market penetration of generic drugs, and 5.0% annual growth). Chace-Ortiz also pointed to favorable fundamentals in the following markets: Venezuela (generic-drug sales of $470 million, 25% market penetration of generic drugs, and 21.0% annual growth); South Korea generic-drug sales of $1.6 billion, 30% market penetration of generic drugs, and 13% annual growth); and South Africa (generic-drug sales of $801 million, 62% market penetration of generic drugs, and 12.7% annual growth). Other markets include: Greece (generic-drug sales of $1 billion, 17% market penetration of generic drugs, and 9.3% annual growth); New Zealand (generic-drug sales of $244 million, 51% market penetration of generic drugs, and 7.0% annual growth);  Ireland (generic-drug sales of $273 million, 19% market penetration of generic drugs, and 6.0% annual growth); and Israel (generic-drug sales of $311 million, 52% market penetration of generic drugs, and 5.0% annual growth). 




How these growth opportunities will align with mergers and acquisitions (M&A) is an important consideration in assessing the direction of the generic- drug market. Consolidation has been a key factor in the generic-drug industry during the past 10 years, a trend that is likely to continue. Chace-Ortiz pointed out that since 1999, 60% of the top 25 companies have been acquired. Since 1997, 418 M&A deals totaling $78 billion have occurred among the top 200 generic-drug companies. This consolidation has occurred across all sectors in the generic-drug industry. The top 10 companies made 154 deals that accounted for approximately $59 billion of M&A activity, said Chace-Ortiz. Firms ranked eleventh to twentieth in revenues made 64 deals that accounted for approximately $11 billion. Although representing a smaller piece of M&A on a value basis, smaller companies also were active in deal-making. Firms with sales giving them rankings of between the top 21 and 100 companies made 105 deals with a total value of $9.4 billion.

The presence of foreign companies in pharmaceutical markets is also important. Chace-Ortiz pointed out that the average foreign ownership among the top 40 geographic markets for generic drugs is 63%. Moreover, half of the world’s generic-drug sales come from the top 50 companies. This confluence of factors—an already consolidated field among the large players, the larger players seeking mid-sized acquisitions, and growth opportunities in smaller geographic markets, will shape the direction of M&A activity in the generic-drug market. 

 “Industry consolidation is likely to continue at the same pace,” said Chace-Ortiz. “There is also a rich vein of M&A candidates with sales of $500 million to $750 million,” he said.  “Acquisitions will be focused on high-growth markets,” he said, pointing to Latin America, the emerging markets in the Asia-Pacific region (i.e., Vietnam, Thailand, Philippines, and Indonesia), and Japan, depending if that market develops. “M&A will be used to buy into the next-tier emerging, growth-oriented markets,” he said. At the same time, he also foresees the possibility of local consolidation to protect domestic companies against foreign acquisitions in countries such as India, Japan, South Korea, and China.

Further consolidation, slowing growth in established markets, and growth in smaller and emerging markets are important factors influencing the direction of the global generic-drug market.

Seeking Opportunities in Generic Drugs

After Moses led the Israelites out of Egypt, he faced a tough challenge: how to transform a people living as slaves among idol worshippers into a free people believing in one god. His solution to the challenge was pretty extreme: he marched his followers around the Sinai Desert for 40 years until those who had been slaves in Egypt died off and only people who had known freedom entered the Promised Land.

Chief executives at global bio/pharmaceutical companies face a challenge similar to that faced by Moses 2500 years ago: how to transform a deeply engrained corporate culture characterized by high costs and slow decision-making into a culture valuing speed and flexibility. Of course, CEOs don't have the luxury of waiting 40 years for a turnaround, but the efforts at most companies seem to be pretty tepid relative to the problem. Acquisitions and reorganizations address part of the global bio/pharmaceutical companies' problems, but they do little to transform those companies' bloated, slow-moving bureaucracies.  

One company that seems to understand that these times call for bold solutions is Eli Lilly (Indianapolis, IN). During the past two years, Lilly has established a number of strategic sourcing relationships that simultaneously have reduced its fixed cost structure while giving it access to best-in-class development and manufacturing services. 

The largest of those strategic relationships was the long-term deal with Covance (Princeton, NJ) announced in August 2008. Covance received a 10-year contract worth a minimum of $1.6 billion to provide a package of services, including most of Lilly' toxicology and central laboratory requirements. As part of the deal, Covance acquired Lilly's 450-acre campus in Greenfield, Indiana, outside of Indianapolis, with its 600,000-ft

  facility housing toxicology and bioanalytical laboratories. Covance took on most of the 265 Lilly employees working at the site. 

Most recently, Lilly announced a strategic deal with Fisher Clinical Services, a unit of Thermo Fisher Scientific (Waltham, MA), for manufacturing, packaging, labeling, and distribution of clinical-trial materials (CTM). Under the agreement, Fisher Clinical will assume responsibility for the CTM operations at Lilly Technology Center in Indianapolis and will purchase Lilly's manufacturing and packaging equipment. Staff of Lilly's CTM operations will be given the opportunity to apply for positions with Fisher Clinical Services. 

The Covance and Fisher Clinical deals are notable for their size and scope. Lilly, however, also has put into place other strategic deals for a variety of services in discovery, clinical research, and manufacturing (see Table I). 

 Table I: Eli Lillys strategic sourcing relationships.

Lilly has been forced to deal with circumstances of looming patent expirations and late-stage clinical failures that are particularly dire even by Big Pharma standards. It has responded by coming up with some of the most innovative drug-development and restructuring initiatives yet seen in the industry. 

One of those initiatives is its FIPNet (fully integrated pharmaceutical network) strategy. Under FIPNet, Lilly is partnering with service providers with which it has gained extensive experience and which have proven that they can perform key functions more quickly and cost-effectively than Lilly has been able to perform them in-house. The Covance, Fisher Clinical,  and other strategic sourcing arrangements shown in Table I are part of the FIPNet strategy. 

Another noteworthy initiative has been Chorus, Lilly's effort to do a better job of qualifying potential drug candidates and reducing the costs associated with late-stage clinical failures. Originally established as an experimental business unit focused on selected discovery candidates, Chorus completely rethought the process by which drug candidates are screened and selected for further development and devised an entirely new set of experiments to determine the drug potential of compounds identified in the discovery process. The Chorus program has been so successful that it has been expanded to encompass more compounds through the early-development process and is participating in a novel new venture with a private equity firm to develop new drug candidates. 

FIPNet and Chorus are a long way from the traditional vertically integrated and paternalistic culture of what was once described to me as "the Lilly Way." Desperate times call for desperate measures, but those desperate measures may be the innovations that Lilly and other global bio/pharmaceutical companies need in an increasingly challenging environment.  

 is president of PharmSource Information Services, Inc., and publisher of 

Outsourcing

Eli Lilly faces up to the new realities of the bio/pharmaceutical industry through outsourcing.

PTSM: Pharmaceutical Technology Sourcing and Management-05-05-2010

The Changing Business Models for Innovator-Drug and Generic-Drug Companies

Seeking Opportunities in Generic Drugs

The Lilly Way